Voidable transaction provisions of Act allow payment ‘clawbacks!’

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A recent High Court decision involved TRC Consultants Ltd, an audio-visual componentry company, which was asked to pay back $55,000 worth of payments received from Southern Lakes Construction Limited (SLC), a company that went into liquidation, within months of the payments being made.

The voidable transaction provisions of the Companies Act 1993 allow the liquidators of a liquidated company to claw back payments made out to creditors within a restricted period of six months prior to the liquidation.

This case concerned two payments made by SLC near the end of the construction contract. The first payment was made on September 30, 2005, and the second payment on October 4, 2005, and totalled $55,000. SLC went into liquidation on or about November 23, 2005.

It was argued by this firm on behalf of TRC that the two payments ought not to be set aside for the following reasons:

• It had not been satisfied that TRC received more towards satisfaction of its debt with SLC than it would otherwise have got in liquidation,
• The transaction took place in the ordinary course of business. Under this head we argued that:

• these payments were one of a series of payments made pursuant to a contract with regard to the construction and installation of equipment at the request of SLC. The business records established that during the course of the contract, SLC had made regular payments following the receipt of invoices. Some of those payments were up to two months after the invoices had been rendered;

• although these two payments were not for the full amount claimed in the invoices, this is not uncommon in building contracts where often head contractors retained sums as an inducement to ensure that the subcontractor completed the contract, and to cover any defects or maintenance with regard to work performed by the subcontractor.

Finally we argued in the alternative, that even if the transactions were voidable, that TRC was entitled to relief under s296(3) of the Companies Act 1993 because:
• TRC had established it had received the payments in good faith,
• TRC had altered its position in the reasonably held belief that payment was validly made and would not be set aside. In support of this, TRC had continued to arrange for its subcontractor to perform work on behalf of its contract with SLC for some months after receipt of these two payments.

TRC had incurred considerable expense in continuing work on this project which it would not have incurred had it known about the impecuniosity of SLC. After the last payment made by SLC, it rendered a further account to SLC of $18,991 and $4720.08. 
• Finally we submitted that the large delay of 18 months in serving notice upon TRC to pay back the $55,000 made it inequitable to order these monies be paid back.

The judge held that the payments fell within the meaning of payments made in the ordinary course of business.
He was swayed by the evidence to the effect that payments at the end of a contract are often less than is claimed because retentions are held back in order to ensure contractors come back onsite.

Industry not characterised by prompt payment and precise accounting

He also referred to comments in already decided decisions on this point, that the building industry is not characterised by prompt payment and precise accounting.
He further found that even if he was wrong on this point, TRC was entitled to relief under s296(3) of the Companies Act 1993. His key finding on this aspect was that TRC had altered its position. At paragraph 31 he states:

There is, however, clear evidence that the plaintiff, after receiving these two payments, continued to perform its obligations under the contract with SLC. Furthermore, in performing its obligations, the plaintiff incurred extra expense including liability for payment of work performed by its subcontractors.

Valuable alternative opportunity lost

In short, TRC had lost a valuable alternative opportunity in refusing to continue to perform the contract.
While, in this instance, we managed to achieve a good result for TRC, the case does show the difficulties caused by accepting payments from companies that shortly afterwards go into liquidation.

Unless it can be shown that the payments were made in the ordinary course of business or that the position of the party receiving payment has been altered, then that party may have to pay back the sums received.